DC Commercial Real Estate Market Still Facing Challenges Thanks To Pandemic
Washington DC: The COVID-19 pandemic’s effects have subsided in many cases, but the market for commercial real estate is still impacted by the persistent popularity of remote work.
This is significant in D.C. because commercial office buildings generate over $1.1 billion in tax revenue for the city, and uncertainty about building values increases fiscal risks.
The percentage of a building’s leasable space that is currently unoccupied is known as its vacancy rate. The percentage of space in a building that is either vacant or soon to be vacant is known as its availability rate. According to availability rates, there is a chance that vacancy rates will rise significantly in several D.C.’s commercial real estate submarkets.
The margin of potential increases in the downtown submarkets (East End and CBD), which are home to the majority of commercial office buildings, is particularly concerning. If leasing activity does not improve, East End and the CBD could see increases in their vacancy rates of 7.7 and 3.3 percentage points, respectively.
The results are dire given the impending fiscal cliff in 2024: if vacancy rates and cap rates keep rising, tax revenue could be lost by as much as $157.7 million. This equates to roughly 1.6 percent of local tax revenue and 10% of all money received from commercial property in D.C.
The annual tax revenue loss to the District could be as high as $102 million if vacancy rates rise to availability rates. East End and the Central Business District would see the greatest value losses. These two submarkets stand to lose the most value, amounting to an estimated $92 million in lost tax revenue, because they have the greatest space and the widest gaps between vacancy and availability rates. This exceeds the estimated revenue loss by 90%.
